Navigating a real estate purchase agreement

Unless you’re a lawyer (or get divorced), you may never see a contract as complex — or landmine-laden — as a real estate purchase agreement.

Before you sign, learn exactly what you’re agreeing to — and try to make changes if you don’t like the terms.

Also known as a real estate purchase contract, a real estate purchase agreement is a must for a home sale. In the U.S., homes cannot be legally bought and sold without a written agreement signed by all the buyers and sellers.

(For example, if the house is jointly owned by a couple, but one refuses to sign the purchase contract, the deal is off.)

In some cases, an appraiser must value the home at (or near) the proposed purchase price. In other cases, the deal may hinge on whether the buyer can first sell her old home.

Once the real estate purchase agreement is signed, it’s legally binding. And if all the contingencies are met, canceling the deal can be difficult.

Can I cancel a real estate purchase contract?

Yes, but it probably won’t be easy unless you have a valid reason. (Simply changing your mind is not a valid reason.)

Almost every contract includes “earnest money” that you pay upfront when you enter escrow. Earnest money is designed to make sure you perform your contractual obligations. If you don’t, and you don’t have a good cause, the buyer can keep that money.

That’s called “liquidated damages,” and in most areas, forfeiting your earnest money gets you out of the deal, with no further repercussions.

The best way to back out is to cancel the deal before signing a purchase agreement. Failing that, you could try to insert “escape clauses” in the contract that make it easier to cancel. The seller (or her attorney) will probably balk, but it can’t hurt to try.

Harsher consequences

Not every state lets you get out of your contract by simply giving up the earnest money. While rare, you could end up in a nightmare battle over a failed transaction.

If all contingencies are met, pain-free cancellation may be impossible. In some jurisdictions, real estate contracts are “specific performance” agreements. This means that all the parties are required to complete the contract.

Many buyers will let you cancel if you ask them, (the average person doesn’t like forcing a sale).

But if the seller refuses to cancel, and you still back out, he or she could file a lawsuit. If so, a judge could find you in breach of contract and compel you to buy the house.

(If a seller tries to get out of a contract without good cause, a buyer can also force a sale by filing suit for “specific performance.”)

Mistakes to avoid

But this doesn’t mean that they’ll protect you if you find yourself in court.

A few years ago, a Florida couple contracted to buy a house for $620,000. The purchase contract stipulated that the sale was contingent on the house being appraised for “no less than $620,000.”

Two appraisals were done. One arranged by the buyers came in at $560,000, but the sellers’ appraisal valued the house at $635,000.

The buyers refused to close. The sellers sued for breach of contract but lost. The judge ruled that the phrase “appraising for no less than $620,000” meant that no appraisal – not one – could be less than $620,000.

Before signing a contract, make sure the language is clear enough and specific enough to safeguard your interests.

And never make assumptions. One common buyer mistake is assuming that the house comes with all the major appliances – from refrigerators and stoves to washer-dryer sets.

Imagine their disappointment on move-in day when they discover an empty kitchen and utility room.

To avoid this scenario, some buyers insert an addendum that includes such personal property in the purchase price. That’s another mistake.

Mortgage lenders finance homes, not refrigerators, washers and hot tubs. To keep from endangering your loan, an addendum for personal property should clearly state that this property has no effect on the real estate’s value estimate.

To avoid this (and other) mistakes, familiarize yourself with real estate purchase agreements before making an offer. Find a template online or ask your agent to give you a sample agreement to review.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.